Britain heads back towards recession after slumping 0.2pc

The British economy has begun to contract once again and at a faster rate than
expected, raising the prospect of the country being plunged back into
recession little more than two years after clambering out of the last crash.

The economy shrank 0.2pc in the final three months of 2011, official figures from the Office for National Statistics (ONS) show, as the manufacturing sector slumped back into decline.

Economists, including those at the Treasury’s independent forecaster the Office for Budget Responsiblity, had expected a decline of just 0.1pc.

The fact that Britain’s factories are in crisis again will comes as a damaging blow to the Coalition, which has pinned its hopes for recovery on rebooting the UK’s lacklustre industrial production.

Manufacturing output declined by 0.9pc, its first fall since the tail-end of the last recession in 2009 and its steepest fall since the onset of the downturn in 2008.

Often seen as a bellwether for the rest of the economy, the scale of decline immediately raised concerns about the prospect of an technical double dip – defined as two consecutive quarters of contraction.

“Our bet is that the UK is now back in recession and that the economy will continue to contract for most of this year,” Vicky Redwood, Capital Economics’ UK chief economist, said.

For 2011 as a whole, the economy grew by just 0.9pc – its weakest since the recession.

George Osborne blamed the downturn on the eurozone and insisted that the Government would not change tack on austerity.

“These are disappointing figures about what happened to the economy at the end of last year, but they are not entirely unexpected because of what’s happening in the world and what’s happening in the eurozone crisis,” he said.

“We have got the right plan, we have got to stick to it but we have got to accept that Britain’s economic problems, difficult as they are, built up as they have been over the last 10 years, have been made worse by the situation in the eurozone, by the crisis on our doorstep.”

Prompting further concern about the outlook, though, was the scale of contribution from the state. Government output was the largest contributor to growth in the final quarter of 2011, increasing 0.4pc, despite the austerity round.

James Knightley at ING Financial Markets said: “Unfortunately UK economic activity is likely to get worse before it gets better with a technical recession likely to be confirmed by first quarter GDP numbers... Austerity measures mean government spending will contract and the eurozone sovereign debt crisis is hurting exports to the UK’s largest trading partners.”

The UK’s powerhouse services sector, which accounts for three quarters of national output, flat-lined in the quarter, while construction shrank by 0.5pc.

Confirmation that the UK is back in decline for the first time since the weather-affected contraction of 0.5pc in the final three months of 2010 followed the warning from Bank of England Governor Sir Mervyn King that the recovery would be “arduous, long and uneven”.

It also came after the International Monetary Fund cut its growth forecasts for the UK this year from 0.7pc to 0.6pc and warned that the world economy “could be plunged into another recession” by the eurozone crisis.

However, Sir Mervyn stressed that progress was being made in rebalancing the economy away from its dependency on the City of London towards manufacturing and exports, and that the country would eventually emerge “on a more sustainable footing than at any point in the past 15 years”. “There is no reason to despair,” he said.

Other economists pointed to the recent flurry of positive data, suggesting that the last quarter was the low point.

Chris Williamson, UK economist at Markit, said: “The three PMI surveys collectively signalled the strongest expansion for five months at the end of last year, and other official data released today showed the service sector expanding 0.6pc in November, setting the stage for a possible rebound in GDP growth in the first quarter.

“While the UK clearly faces a clear risk of sliding back into another recession, there are growing indications that any downturn is likely to be mild and short-lived.”